ABSTRACT
This research work presents the Dividend Policy on
Firms’ Earning in Nigeria. Dividend being the amount of net profit available to
the ordinary shareholders. Management is faced daily as to what decision to
take on profit generated from the business. Should this profit be retained in
business for future expansion or paid out as dividend to shareholders. There is
a need to strike a balance on this for the general benefits of the investors.
The dividend earnings of firm is the confidence of the investors on his
investment decision. There are two basic broad categories of investors: Passive
and Active. Passive investor believes that the market is perfect and will
therefore result in adequate reward while the Active investors believe he can
beat the market because the market is not perfect. He believes he has access to
better information over other investors. He incurs huge transaction cost and
his profit/loss could be significant. Risk and time are two major variables
with direct relationship to returns. The higher the risk and the longer the
time, the higher the return. Equity holders are risk bearer who will expect
higher returns for a given level of investment. The relationship between
Dividend Policy and Firms’ Earning has been proved to be perfectly correlated.
Investors expect stable dividend for income. There could also be preference for
capital appreciation by way of bonus issue. In all, there is the need for
management to handle all decisions relating to dividend policy with absolute
diligent for corresponding effect on the firms’ earning which is the
measurement of stakeholders’ wealth.
CHAPTER ONE
INTRODUCTION
1.
BACKGROUND
TO THE STUDY
Dividend
according to Nwude (2003) “is the share of the company’s legally available
profits divided among the shareholders
and received by the shareholders in cash
(where cash is paid out) or stock (where stock is paid) or both in other forms
of paper claims to wealth”. Dividend is the reward for investing in the
company.
Dividend
plays an important role in determining the value of share in the capital market
by investors. Payment of dividends satisfies the residual shareholders’ desires
for some return on their investment and increases their confidence in the
future of the company in which they invested their money. In addition, every
investor by policy is paid dividend at the end of every financial year, net
earnings remaining after paying of creditors, tax authorities, expenses,
preferred stockholders are paid out as dividends “or shared between retained
earnings and cash dividends” or stock dividends. This enhances the firms share
value in “capital market as the demand for the stock of such good dividend
paying company will increase thereby pushing the share price upwards. This is
called demand push share price increase. On the other hand, retained profits
can also be reinvested in the company for meeting the expansion needs, profit
targets and growth records.
Therefore,
an effective dividend policy is extremely important for company in its desire
to maximize the wealth of its stockholders.
Dividend
policy, according to Pandey (2003) “is the guiding principle for determining
the portion of a company’s net profit after taxes to be paid out to the
residual shareholders as dividend during a particular financial year. The
purpose of a dividend policy should be to maximize shareholders’ wealth, which
is dependent on both current dividend and capital gains”.
What happens
to the value of the firm as dividend is increased, holding everything else
(capital budget and borrowing) constant. Thus, it is a trade-off between a
retained earnings on one hand, and distributing cash or securities on the other
as follows:
Maintenance
of Stable Monetary Amount; the guiding policy is that firms will maintain and
pay out to residual shareholders a stable amount in naira value as dividend in
spite of the company’s performance during any year. Once that fixed amount is
paid out from the earnings available to residual owners, any excess is retained
in the business for other investment opportunities. Note: If the fixed amount
is greater than the earnings available to residual owners, the deficit could be
met from the revenue reserve. The implication is that if a company’s earnings
per share is N5 during a year and has the policy of paying N5 divided per share
every year, nothing will be left for investment purpose even though there is an
investment opportunity existing or showcase. It encourages investors to pay
high price for the company stock.
Maintenance
of Stable Payout Ratio; This is a policy
in which the firm decides to pay out a fixed percentage of its net profit as
dividends to residual owners. The implication is that it often leads to
fluctuation in her dividend policy.
Payment of
Extra Dividends Over And Above the Fixed Ratio or Fixed Amount; this policy is
an addendum to the maintenance of stable monetary amount and maintenance of
stable payment ratio. If the firms make excess of the net profit, the balance
can be used to improve or increase the dividend amount payable under fixed rate
or used to invest or as a plough-back to the business.
Residual
Dividend Policy; The decision here is that is to pay out whatever is left over
after taken care of the capital requirements of the firms to residual owners as
dividend. Therefore, effect of dividend policy on firms earnings in Nigeria
will be elaborated upon in subsequent of the project work.
1.
PURPOSE
OF THE STUDY
Effects of
dividend policy on firms’ earning in Nigeria can be achieved by the selection
and adoption of various dividend policy in Nigeria that will lead to
improvement in shares and market value of the firms:
1.
Find the relationship between dividend
policy and the determinant factors of dividend policy.
1.
The effect of dividend policy on
practicing firms.
1.
To make recommendation based on the
findings.
1.
SCOPE
OF THE STUDY
This project
work is centered on the effect of dividend policy on firms’ earning in Nigeria.
The various determinant of dividend policy, forms of dividend, the dividend
debate, objectives, mathematics of dividend policy, dividend payment procedure,
cash dividend, stock dividend, stock repurchase, stock split etc. will be
treated in detail in the subsequent chapters of this project work. The project
work tend to touch every organization in Nigeria that adhere strictly to
dividend policy but due to financial and time constraints, it narrow the scope
of study to United Nigeria Bank for Africa Plc (UBA) and other interview will
be carried out in some other manufacturing organization.
1.
STATEMENT
OF THE PROBLEM
In order to
look into the financial management objective of shareholder wealth
maximization, organization pursue investment, financing and decision which will
increase value to the owners of the business. This additional value depends on
the dividend policies that is reflected on the market value of the firms’
stock. For long-term owner value to be maximized, a dividend policy which is
consistent must be pursued. Hence, commitment towards achieving a dominant
position in industry as well as retraining investors confidence has been an
on-going struggle from management of forms.
Therefore,
striking a balance in linkage between dividend policy and firms’ earning is one
instrument in achieving the goal of financial management.
1.
SIGNIFICANCE
OF THE STUDY
1.
To determine the division of earnings
between payment to shareholders and retained earnings.
1.
The firm has to balance between the
growth of the company and the distribution to the shareholders.
1.
To strike a balance between the
long-term financing decision and the wealth maximization.
1.
To ascertain the market price of
share.
1.
Retained earnings helps the firm to
concentrate on the growth, expansion and the modernization of the firm.
1.
To know the financial flow, capital
structure of the firm, corporate liquidity, stock prices, growth of the company
and the investors.
1.
DEFINITION
OF TERMS
This
involves a brief description of the various terms associated with dividend
policy on firms’ earning in Nigeria. The following includes terms that will be
employed in the subsequent chapter of this project.
1.
Dividend:
This is the distribution of value to shareholders. It is the reward for
investing in an organization or for putting ones’ asset into an investment.
1.
Policy:
This has to do with the guiding rules and regulation, principles and mandate upon
which management implore to ensure effectiveness in organization control. It
has to do with the strict compliance in operation.
1.
Stock Dividend:
It is the payment of dividend in the form of issue of additional shares to
residual owners of the firm.
1.
Cash Dividend:
It is the payment of dividend in cash.
1.
Stock Split:
It means the division of existing stock price by two and the multiplication of
such stock by two.
1.
Stock Re-Purchase:
It is the acquisition of the company’s outstanding shares by the company itself
for warehousing in the stock trading.
1.
Firms:
A firm is a business working for the actualization of goals. An individual can
be a firm.
1.
Company:
A company has to do with group of firms engaging in business to realize
primarily profit.
1.
Earnings:
It is the reward that goes to an investor (profit).
1.
Budget:
It is a propose plan quantified in monetary terms showing income and
expenditure to be incurred in the future.
1.
Finance:
This has to do with the asset of a company. It could be in the form liquid or
fixed (fixed or current).
1.
Value:
It is a firms’ worth is a business.
1.
Exchange:
It is the value one give up for wealth acquisition.
1.
RESEARCH
QUESTIONS
The research
questions for this study are as follows:
1.
Are there relationship between
dividend and firms’ earning in Nigeria?
1.
Has dividend distribution been
adequately addressed in the United Bank for Africa Nigeria Limited?
1.
Should dividend policies and firms’
earnings of UBA be redesigned?
1.
Are they any relationship between
dividend and earnings by firm and the management objective of shareholders’
wealth maximization?